Legacy claims refer to those claims, other liabilities or actions which might be known or unknown and which might arise on or before the separation date. Analysing and understanding these legacy claims is imperative for a proper risk management policy of a company. These might arise due to various reasons relating to:

• Injuries or illness related to work which includes worker’s compensation claims, disability or any other insurance providing medical care or compensation to the victimised workers.
• Property damages or any damages associated with personal injury, medical monitoring or wrongful death in connection with operations of a work vehicle.
• Actual or potential liabilities related to employees other than those mentioned in the Employee Matters Agreement.
• Property damages and damages related to personal injury, medical monitoring or wrongful death connected with manufacture, production, sales and distribution, conveyance or commercial placement, inventory or any product.

There are various things which are not included in the legacy claims such as:

• Ashland Global Asbestos Legacy Liabilities except if any such liability is subjected under or is barred or covered under workers’ compensation, disability or other insurance providing medical assistance or compensation to injured workers.
• All environmental liabilities except the ones that are specifically provided in subsection (d) of that definition.

To be defined simply, all claims and appeals which are dated prior to February 19, 2019, and have not yet received a decision are categorised as legacy claims. These are the claims which were filed under the policies and norms valid before February 19, 2019. Any decisions regarding legacy claims will now be under updated policies known as the “modernized review system”. The modernisation of systems has led to a great change in the area of insurance claims management.

Why does a coverage review matter?

There are various reasons because of which conducting a coverage review is mandatory such as the will to exit a non-core line of business or for the redeployment of capital. For these operations, an insurer may decide to cancel out certain legacy exposures rather than carrying them forward, continuing to manage related claims and carrying them forward in the balance sheet. A well-structured transfer of the legacy claims through a loss portfolio transfer (LPT) or adverse development cover (ADC) can allow the insurer to achieve the right results and profits while also providing significant benefits to the acquiring party or the policyholder.

LPT and ADC transactions can be complex, however careful due diligence taking into consideration a number of factors including price, capital charges, accounting treatment and actuarial analysis of reserves is mandatory as per the standard norms. In order to develop a fuller understanding of the risks and potential profitability of the transactions and the acquiring party, it is recommended to undertake a thoughtful analysis or coverage review of the terms of the actual insurance contract and potential associated exposures. This could ease and escalate the work of corporate insurance brokers.

Impact of legacy exposures

There are various policy terms, coverage issues and other factors which can have a massive impact on the liabilities arising due to the legacy exposures. These include the following:

• Standards that are specified in the policies to determine if an injury or damage is intended, expected, is to be included in the contract etc. For an instance, a policy that looks at the standpoint of the insured may create greater liability for the insurer as compared to one that utilizes a reasonable person standard.Government laws and norms which are to be applied to the policy. These laws change from state to state. A certain claim might be covered under one state’s law while the other state might not consider it. These distinctions can significantly impact the amount of coverage or insurance claim that the policyholder might receive.
• The coverages of the policy and the allocation method that are to be utilised for long-tail claims.
• Punitive damages that are covered under the policy if any.
• The way the policy would respond to claims arising out of an emergency or unpredictable situations like cyber and privacy regulations, technological upgrades, etc which were not thought of or considered during the issue of policy.
• Methods the policy specifies for the coverage of disputes, for example, a requirement of mediation or arbitration, etc.
• Defence costs that are included within the coverage limits if any. If the defence costs are not included, the recent proliferation of litigation financing would significantly compound the risk.
• The way the policy treats multiple claims arising out of a single product. Does the policy consider it as one aggregated occurrence or as multiple occurrences?
• The history that the policy holds. This might include exposure to frauds and bad faith, etc.

Depending upon the category of risk that is being transferred, for example, construction deficit, industrial diseases, environmental risks, etc a few factors might carry more importance as compared to the others and more issues might have to be added or analysed. But in all cases, developing a deep driven understanding of the risks associated with specific policies, policy norms and related coverage issues might enable the acquiring party to price and structure the deal rightly in a way that benefits both parties increasing the probabilities of a profitable result.

Modernization of these legacy claims can also help in the development of a healthier portfolio depending upon the risk covered in the policies. Incorporating the new technologies even if it is done over a certain time period can help insurers of all sizes compete and sustain in this demanding marketplace. With modernization, insurers would not just limit to balancing their loss ratios but they might be able to develop stronger brand loyalty. This is because it might allow them to cater for customers the way they want to be treated. For many insurers, upgrading from the legacy core system to a flexible modern platform also involves a shift to broader strategies for establishing basic priorities. This might help them to widen their horizons in the industry.

Contact Deinon Insurance Brokers LLC at infra-energy@deinon.ae for the best insurance solutions.